Sydney view: $10bn alarm for people planning a small flutter

By GILES PARKINSON*

Fund manager AMP last week made what appeared to be a most extraordinary announcement.

The biggest fund manager in Australia had $A10 billion of shareholder funds invested last year and had made a loss.

How could this be so? If the biggest fund manager in the country cannot make any money out of its investments, then what hope has the rest of the investment community, particularly the private investor?

In 2000, AMP reaped $A617 million from its investment of shareholder funds. In the first half of last year, it earned just $25 million.

It thought it would match that in the second half, but a further downturn in the London market condemned it to a small loss, or what it describes as "marginally negative investment income".

(This must come from the same school of writing that describes sunken ships as "suffering serious submersion").

The unfortunate terminology notwithstanding, AMP seems relatively unfazed by the situation, and so do market analysts.

They have adjusted their net profit forecasts accordingly, and yet it caused barely a ripple in the share price. The reason for this is simple. AMP's performance is judged primarily on the quality of its core revenue, which comes from premiums and fees.

The group is required to mark its investments to market, but this merely reflects the movements, more or less, of the world's financial markets in a certain period.

Most investors understand the need for a long-term view. But fund managers are judged, ranked and analysed every three months on their yearly, six-monthly or even quarterly performances.

The effects can be quite disconcerting, and the process can have unfortunate results.

Fund managers find themselves under pressure to abandon their better instincts of long-term investments for the sake of short-term gains, and that is something which is largely decided by trying to guess the mood of the mob.

The safest bet for many managers can often be to take a punt on the worst-performing sector in one period, confident in the prediction that this is what others will do.

So the best-performing sector in one period, suddenly becomes the worst in the next. And vice versa. It is called the what-sector-goes-down-must-go-up theory of investing, says ABN Amro analyst Gerard Minack, and it is the underwriter of bull market psychology.

So, on the first days of trade this year, there is sudden movement in the Nasdaq. Guess what! The worst performing sector of last year could be poised to make a rebound.

And what is the advice to fund managers?

"There's more risk not to be in tech, than to be there," says one, in apparent ignorance of all the stocks that had gone belly-up.

It has all the ingredients of a well-informed and quite illogical market. Some, such as Mr Minack, believe markets, particularly the Australian, are fully priced.

Many others are very optimistic. It should be an interesting and wildly unpredictable year.

* Giles Parkinson is editor of AFR.com